ER underdeposits EE 401(k) deferrals

[Guest Mike Schwing]

An employee indicates they want to have 10% of pay deferred into the company 401(k) plan. The employer only withholds 5% and matches on the 5%. The employee never says anything to the employer about the miscalculation - has left employement and received a distribution of his account.

What is the ramification to the employer - if any - for failing to withhold the proper amount? Does the employee's failure to notify the employer in a timely fashion have any bearing? What if anything should the plan do to rectify the error?

This happened on a number of the employer's employees.

[david rigby]

Might depend on what the plan says. Is there any plan provision that could limit the EE to 5%, directly or indirectly?

How long did this "incorrect" deduction go on?

[Guest Mike Schwing]

There is no document language to this regard.

The miscalculated deferrals carried on for a fairly significant time frame.

[Archimage]

My personal opinion is that the the employer would be responsible for the contributions missed (5%) plus earnings for maybe two or three payrolls. After that the participant should have noticed and made an effort to correct the situation.

I base my conclusions on IRC 502(a)(1)(b) which gives the participant a right to recover benefits due to an error in the administration of the plan, and IRC 502(a)(3)(b) which relates to a participant mitigating damages.

[Guest jhilliard]

I base my conclusions on IRC 502(a)(1)(b) which gives the participant a right to recover benefits due to an error in the administration of the plan, and IRC 502(a)(3)(b) which relates to a participant mitigating damages.

Based on the string, the only lost benefit would be any gain the participant might have received. They did not loose any pay!

I have seen this happen and an interest lost calculation was performed and the participant was made whole (from an earnings point) The participant can (based on plan limits) always increase deferrals to help make up the missed contributions.

[david rigby]

Is this an HCE? Ifso, could the ADP test results have limited the EE's contribution anyway? 402(g) limit could also be relevant.